The Countdown to the Collapse of Saudi Arabia: iPath S&P GSCI Crude Oil Total Return (NYSEARCA:OIL)
Recent events involving Saudi Arabia have led me to believe that the clock has started ticking on the ultimate demise of the KSA.
Here is what they are now facing:
First, they are rapidly running out of money. According to an IMF report, as long as oil prices remain below $50 to $60 dollars a barrel, at their current rate of domestic and military expenditures, the Saudis will run out of cash reserves by 2020.
The proposed IPO of Saudi Aramco in 2018 could extend this projected shortfall a bit, but it’s only likely to be a short term solution. The Saudis actually need prices over $100 a barrel or they have to cut spending to balance their books, something they have started to gradually do now. But more will be required soon.
Second, their arch rival in the region, Iran, has them strategically boxed in from the north AND from the south with the Houthi rebels in Yemen. And now this latest diplomatic spat with Qatar is threatening to bring the Qataris into the Iranian sphere of influence.
Third, even with those problems it is the internal situation in Saudi Arabia that is most alarming.
What has held the KSA together over the years is a combination of oil money and an alliance with extremist Wahhabi Imams. The oil money has allowed the monarchy to highly subsidize the Saudi population to keep them pacified while the royalty lived lives of conspicuous consumption.
Their alliance with the Wahhabis kept the more extremist religious elements at bay.
But now that is changing and it has the Royals scared to death.
70% of the Saudi population is under 30 and it is estimated that 20% are unemployed. If subsidies are cut these young people, many schooled from childhood in the extreme radical and jihadist Islamic beliefs of the Wahhabis, will almost certainly rise up in protest.
Even more dangerous is the rumored intention of the new Crown Prince/Defense minister, who is calling the shots in the Kingdom these days, to institute policies to curtail the power and influence of the Wahhabi Imams and to liberalize and secularize Saudi society. Granted, something along these lines has to be done to save the KSA economically, but it is highly doubtful that the Imams will take this lying down and will more likely encourage open revolt against the current rulers. And it is highly likely that many of these Imams are sympathetic to the goals of ISIS and could easily invite them in to “purify” the KSA that acts as little more than a puppet for the U.S. in their eyes, and return the Kingdom to the path of “true” Islam.
So what does this mean for you as an investor?
First, an event like this, once it starts, will have worldwide repercussions, particularly for Energy markets, Precious Metals and Agriculture as a burst of global inflation should break out as it did in the 1970s and these investment categories will be the primary beneficiaries. If you are not already doing so you should start closely monitoring these ETFs: iPath S&P GSCI Crude Oil Total Return (NYSEARCA:OIL), SPDR Gold Trust (ETF) (NYSEARCA:GLD), and PowerShares DB Agriculture Fund (NYSEARCA:DBA),
Second, the Petrodollar system that has enabled the U.S. to become the dominant economic and military power in the world will be in jeopardy.
But we’ll have to deal with what THAT means for you in another article.